US-China – Xi-Trump meeting preview: We expect no game changers
- We do not expect the Trump-Xi meeting on May 14-15 to lead to major breakthroughs in US-China relations. We expect near-term financial market impact to remain limited.
- Trump does not have the incentives nor the means to ramp up the pressure on China with focus remaining on the war in Iran and earlier court ruling still constraining his tariff weapon. For China, keeping relations on a stable track is the main priority, especially when it comes to Taiwan.
- The countries could agree on China increasing purchases of US agricultural goods, an extended tariff truce and establishment of mutual trade and investment ‘boards’, though these should be seen as largely symbolical. Change in the wording of US policy on Taiwan would be a major victory for China.
The premise for the meeting between the leaders of US and China has changed on multiple fronts since Trump and Xi agreed on a trade war truce in Busan last October. The US has entered a war in Iran, which overshadows the growth outlook for both economies. Trump’s main weapon for applying leverage in the negotiations, the IEEPA tariffs, were ruled illegal by US Supreme Court. And finally, AI-related demand for computer equipment is accounting for a rapidly growing share of US import value.
Long-term US tariff framework is still in progress
A key reason for why we do not expect another flare-up in the tariff war between the two countries is that the US administration’s long-term plan for replacing the nowillegal IEEPA tariffs is still in progress. Supreme Court’s ruling against IEEPA invalidated both the 10% ‘fentanyl’ tariff and the 10% ‘reciprocal’ tariff on China. The latter one was replaced by the universal 10% Section 122 tariff rate, and while it was also ruled illegal by US Court of Internation Trade last week, the rate remains in effect for now.
The long-term tariff plan relies on the Section 301 of the Trade Act of 1974, which allows the president to impose tariffs against discriminatory trade policies. Trump imposed Section 301 tariffs against China already during his 1st term, which largely remain in place today. The USTR has opened investigations for expanding the measures (not just against China, but also more than 60 other economies) on the basis of excess industrial capacity and the use of forced labour. While these topics will likely be discussed this week, the investigations are only expected to conclude over summer. This means that for now, Trump has only very limited ways to increase tariff pressure, despite his recent sporadic threats against, for example, the EU.
Alongside the universal 10% rate and the 1 st term measures, China is also affected by product-specific Section 232 tariffs targeting cars, car parts, various metals, certain pharmaceuticals and wood products. We estimate that the combined average trade weighted tariff rate hovers close to 20%. We expect the administration to aim for a somewhat higher rate in the long-run, consistent with the earlier IEEPA approach.
Author
Danske Research Team
Danske Bank A/S
Research is part of Danske Bank Markets and operate as Danske Bank's research department. The department monitors financial markets and economic trends of relevance to Danske Bank Markets and its clients.
